A Member of Pat McKeough’s Inner Circle recently asked for his advice on Leafly Holdings, an online marketplace company that specializes in the cannabis industry.
Pat likes the track record of growing revenues and the prospects of an expanding market for legalized cannabis south of the border. However, the company still needs to show consistent profitability and this may require more than ongoing cost-cutting plans.
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Leafly Holdings Inc. (Symbol LFLY on Nasdaq; www.leafly.com), is a Seattle-based online cannabis marketplace. Leafly was founded in 2010 and is considered the world’s largest cannabis marketplace, with more than 125 million annual visitors.
The company’s revenue primarily comes from a monthly subscription fee paid by cannabis retailers for listing on the platform and accessing its e-commerce tools. More than 7,800 brands from 5,637 cannabis retail subscribers use its services. Leafly finished the third quarter of 2022 with 8.2 million monthly active users (consumers).
The platform also makes money from advertising.
On August 9, 2021, Leafly announced that it would combine with Merida Merger Corp. I, a special purpose acquisition company (SPAC).
SPACs are a specialized kind of IPO (Initial Public Offering, or new stock issue). One key difference is that SPACs, also referred to as “blank-check companies,” raise money from investors without providing a detailed business plan. The SPAC goes through an IPO-like process, raising some money and getting listed on an exchange.
A SPAC’s next goal is to find another business to buy, usually within two years. Then the two companies merge, giving the purchased company a relatively quick stock exchange listing and the liquidity that comes with it.
Leafly and Merida announced on February 2, 2022, that they had completed their combination. By agreeing to a reverse merger with Merida Merger Corp. I, Leafly was able to avoid all the complications and costs involved with going public through an IPO. The merger also provided Leafly with $150 million in cash and no debt.
Leafly’s shares then began trading under the LFLY symbol.
From 2020 and 2021, before the merger, Leafly’s revenue climbed 18.3%, from $36.4 million to $43.0 million. In 2022, revenue rose a further 10.1%, to $47.4 million. The company lost $10.0 million, or $0.13 a share, in 2020; it then lost $12.0 million, or $0.16 a share, in 2021. In 2022, it made $5.1 million, or $0.14 a share. However, that profit included a one-time gain of $36.8 million related to derivative valuations.
Inner Circle: Increased costs are an issue but revenues continue to climb for Leafly Holdings
In the three months ended December 31, 2022, Leafly’s revenue was $12.11 million, up slightly from $12.08 million a year earlier. In addition, it finished the quarter with 5,806 retail accounts, 10.3% higher than the 5,265 a year earlier.
The company lost $5.8 million, or $0.17 a share, in the quarter, compared to a loss of $5.1 million, or $0.21 (on fewer shares outstanding).
Leafly has partnered with Uber Eats to bring a third-party delivery platform to cannabis retailers and consumers in the local Toronto market. Torontonians 19 years of age and older can place orders from local licenced cannabis retailers in the Uber Eats app and have the product delivered to their door. The partners believe this is the first time globally that cannabis delivery will be available on a major third-party delivery platform.
Leafly has been active in Canada’s cannabis marketplace for more than four years and currently supports more than 200 cannabis retailers in the Toronto area.
Going forward, to boost profitability in its competitive marketplace, the company recently cut 40 positions—or 21% of the company’s workforce—and made other spending reductions. It expects the cuts will let it save $8 million annually.
Meanwhile, Leafly aims to continue to grow as more U.S. states legalize recreational marijuana. (There are currently 22 U.S. states, Washington, D.C., and Guam that allow some form of recreational marijuana. Medical marijuana is legal in 38 states and Washington, D.C.)
Recommendation in Pat’s Inner Circle: Leafly Holdings Inc. is a hold.
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